Is Kinect Sticky Enough?

Stickiness is such a slippery concept. A sticky bun is delicious, but a sticky situation is hopeless. Sticky Fingers was a great Rolling Stones album, but otherwise, sticky fingers make you a kleptomaniac.

In business, though, there's nothing ambiguous about it: Sticky sales are just great.

Stick it to me!
Take Nintendo (OTC BB: NTDOY.PK), for example. The Wii is the leading video-game console, with an installed base of 35 million units in the U.S. alone, and more than 67 million worldwide. That's way ahead of Microsoft's (Nasdaq: MSFT  ) Xbox 360 (50 million globally) and Sony (NYSE: SNE  ) PlayStation 3 (almost 34 million, again worldwide). If that was all, Nintendo would be a happy camper.

But that is most definitely not the whole story of Nintendo's success. Software accounts for nearly double the dollar sales of gaming hardware, and Nintendo has made darn sure that every Wii sold will inspire a whole bunch of game purchases -- directly from Nintendo.

Of the 10 biggest-selling video games of 2010, six were made for Nintendo's Wii or DS platforms and published by Nintendo itself, including the top 3. Activision Blizzard (Nasdaq: ATVI  ) could make a case that Call of Duty: Black Ops adds up to the biggest hit of all once you combine its sales across all platforms, but then Activision has no skin in the hardware game and can't claim to have a symbiotic keiretsu going on. Nintendo does.

I'm a stickler for sales
You may have heard of Apple (Nasdaq: AAPL  ) , another proponent of the closed-ecosystem model. Steve Jobs wants a cut every time you buy an iPhone, or the software you want to run on it, or even the media you'll consume there. Nintendo and Apple are philosophical twins, separated at birth. This is how you build a success story.

So when Microsoft announces that 10 million units of its Kinect controller have sold to date, I'm suitably impressed by the quick uptake but not blown over until software sales follow suit. Microsoft cheerfully said that 10 million standalone Kinect games have been sold worldwide as well, meaning about one game per Kinect controller. Not terrible, given that the product's been available since only November. But not great, either.

And when Microsoft presents a list of upcoming attractions for the platform, Mr. Softy's own game-publishing arm makes just a token appearance in the Avatar Kinect social-entertainment app. No, it's not really a game. For that, Microsoft leans on titles from French powerhouse Ubisoft, indie developer Twisted Pixel Games, and rivals including Take-Two Interactive (Nasdaq: TTWO  ) and THQ (Nasdaq: THQI  ) . Moreover, Avatar is free to Xbox Live Gold pass holders, creating approximately zero dollars in additional sales. Whoop-de-doo.

You can beat that with a stick
If my company had developed a winning hardware platform, I'd make sure that the software wing of my house piled on, stat. Microsoft is missing a major opportunity here. In general, this lack of opportunistic killer instinct is what keeps Microsoft's gaming operations down to a mere hobby -- and an expensive one at that, with high manufacturing costs.

If Microsoft wants to make real money on the Kinect, it had better sit its gaming-software division down for a serious talk. Hardware-plus-software synergies create the real smash hits in this business, and when was the last time you got more excited over Sony's hardware-based results than those of exclusive software shops such as Activision or Take-Two?

It's not too late to whip this sorry state of affairs into shape, but the real opportunity may have passed with the high-profile Kinect launch and its first holiday season already in the rear-view mirror. Sorry, Ballmer -- you'll just have to settle for a record-breaking launch of expensive hardware followed by a modest uptick in the truly profitable software sales. I guess any success in this sector feels fresh to the Redmondians.

Keep an eye on Kinect and how Microsoft handles it from here on out. Just add Microsoft to your Foolish watchlist, and you'll be all set.

Editor's Note: A previous version of this story stated an out-of-date figure for Xbox 360 sales. The Fool regrets the error.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Microsoft is a Motley Fool Inside Value recommendation. Take-Two is a Motley Fool Rule Breakers choice. Apple, Activision, and Nintendo are Motley Fool Stock Advisor selections. Motley Fool Options has recommended a bull call spread position on Apple, a synthetic long position on Activision, and a diagonal call position on Microsoft. The Fool has written puts on Apple and owns shares of Activision, Apple, Microsoft, and Take-Two. Motley Fool Alpha owns shares of Activision. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 12, 2011, at 9:37 PM, FreeRange1 wrote:

    Well said. The overblown hype for this "record selling electronic device" also fails to account for the fact that it is simply a peripheral device, not a standalone consumer product. Its like saying we sold a record amount of joysticks - so what! Further, this is actually a very low margin, relatively inexpensive device. Lastly, for the clowns that are giving MSFT a big pat on the back for their innovation, the reality is they bought the technology - they did not invent it. This company should have been broken up long ago by the justice department. It would have at least given them a chance to actually start restructuring and innovating.

  • Report this Comment On March 12, 2011, at 10:43 PM, techy46 wrote:

    A sticky bun is delicious! Best comment on techonogy this week. Hey, fair's fair. Apple shouldn't get credit for the GUI they bought ot from Parc. Google shouldn't get credit for Anrdoid they bought it too but I don't remember the name of what they bought. Maybe the fact that they sold 370 million copies of Windows matters. Nope, only 5 million went to consumers. I forgot, consumers have to have touch screens for their kiosks. It don't matter.

  • Report this Comment On March 13, 2011, at 10:58 PM, baldheadeddork wrote:

    Of course, it is perfectly logical to compare the installed base and software sales of the Wii. Nintendo did introduce its breakthrough hardware four years ago, while Microsoft has had it's game-changer on the market for five months.

    Hey Anders, look up the top selling games for 2006. Never mind, I'll do it for you. Just two games for Nintendo products were on that list, and both of those for the hand-held DS. If you'd written this story in March 2007, you'd be asking if the Wii was sticky enough because it didn't have the the game sales of the six year-old Play Station 2.

    Hardware popularity and installed base leads game sales. That's why the Kinect, being a hit at this time, is a really big deal. The timing could not have been better for Microsoft.

    The Wii hit its saturation point with casual gamers last year and the PS3 continues to underperform. New consoles from anyone are very unlikely for the next two years at least, so Kinect pushing MS into the lead now is a terrific stretch run to take into the next-gen console launches.

    It is a better-than-even bet that two years from now you're going to see as many X-Box titles on that list as you do for the Wii today, when we'll be talking about who's strong today and who needs a big hit from their new console to stay in the game. My SWAG is that Nintendo will be a distant second to the X-Box, and big story will be how Sony is fighting to stay alive.

  • Report this Comment On March 17, 2011, at 4:21 PM, h3nry123456 wrote:

    .

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